Americans Can’t Retire When Bill Gross Sees Repression

March 25 (Bloomberg) -- Twelve years after retiring as a
telephone repairman, Roger Wood clocks 12 to 15 hours a week at
a Lowe’s Cos. hardware store near Glen Allen, Virginia.

“About the same amount I made 30 years ago,” Wood, 69,
says of his $12 hourly wage. “I’m worried about my portfolio
because of low interest rates, even to the point of considering
full-time again.”

Feeble returns on the safest investments such as bank
deposits and fixed-income securities represent a “financial
repression” transferring money from savers to borrowers, says
Bill Gross, manager of the world’s biggest bond fund. Workers 65
and older, struggling with years of depressed yields, are the
only group of Americans who are increasingly employed or looking
for jobs, according to Labor Department participation-rate data.

“We’re going to be financially repressed for decades,”
Gross, the 69-year-old billionaire co-founder of Pacific
Investment Management Co., told Bloomberg Radio Feb. 7, citing
Federal Reserve interest-rate policy that aims to cut borrowing
costs. “I hate to be gloomy, but, yes, for the next 10 years,
the oldsters, and I’m in that camp, are going to be disappointed
in terms of the policy rate.”

About 75 million baby boomers, born from 1946 to 1964, are
starting to retire and face meager returns as a byproduct of the
Fed’s decision to hold its benchmark rate near zero since
December 2008. Policy makers also have quadrupled the central
bank’s balance sheet to a record $4.22 trillion to drive down
borrowing costs.

More Needed

A 65-year-old who wanted to pay for retirement with
annuities tied to bonds needed 24 percent more wealth in 2013
than in 2005, National Bureau of Economic Research President
James Poterba calculated in a research paper released in
February. The increase followed a drop in yields on top-rated
corporate bonds to 3.8 percent from 5.4 percent, according to
Poterba, whose organization is the official arbiter of when U.S.
recessions start and end.

“The magic of compound interest works very slowly when
real rates are very low,” said Poterba, also a professor of
economics at the Massachusetts Institute of Technology in
Cambridge. “Interest rates that have prevailed for the last few
years have made it more challenging for savers to accumulate
wealth, particularly if they are trying to do so in a relatively
risk-free way.”

Stimulus Programs

U.S. Treasury yields are at least 2 percentage points under
what they would be otherwise because of the Fed’s low-rate
policies and stimulus programs, said William Ford, former
Atlanta Fed president who wrote a 2011 paper estimating the
impact on savers of monetary easing. That reduces their income
by at least $280 billion annually, his analysis shows.

“The costs of low interest rates are being ignored,” Ford
said in an interview. “It is killing savers, elderly savers who
are living on life savings that have been conservatively
invested.”

Baby boomers started turning 65 in 2011, and every day for
the next 16 years about 10,000 more will join them, according to
the Pew Research Center in Washington. About 19.8 percent of the
population will be 65 and older in 2030, compared with 12
percent in 2000, Census Bureau projections show.

Almost half of workers aren’t confident they will have
enough money to retire, according to a survey released this
month by the Employee Benefit Research Institute in Washington.
Thirty-seven percent of non-retirees told a Gallup poll last
year they don’t expect to quit their jobs until after age 65,
more than double the 14 percent who gave that answer in 1995.

Facing Crisis

Americans face a “crisis,” said Alicia Munnell, director
of the Center for Retirement Research at Boston College in
Chestnut Hill, Massachusetts, and a former research director at
the Boston Fed. “Five more years of low interest rates are
going to make providing one’s self with an adequate retirement
income extremely difficult.”

The financial crunch probably will reduce consumer-spending
growth in the next decade and also could hurt career prospects
for younger generations, said Steven Ricchiuto, chief economist
of Mizuho Securities USA Inc. in New York.

“Simple, it is a drag,” he said. Either they cut spending
to boost saving or “they will just be forced to work longer,
making it harder for young people to get jobs or move up the
ladder.”

Side Effect

Fed Chair Janet Yellen, who succeeded Ben S. Bernanke last
month, was pressed on Feb. 11 about the impact of the central
bank’s policies on older Americans. During her first semi-annual
testimony to Congress, she echoed her predecessor’s philosophy
that difficulty for savers is an unavoidable side effect of
efforts to boost employment and growth.

“A low-interest rate environment is a tough one for
retirees who are looking to earn income in safe investments like
CDs or bank deposits,” Yellen said. “In a stronger economy,
savers will be able to earn a higher return.”

The current national average rate on a five-year
certificate of deposit is 0.8 percent, compared with 2.26
percent in 2009, according to Bankrate.com. The national average
for money market accounts is 0.11 percent now, compared with
0.48 percent average five years ago.

U.S. Treasuries earned coupons of 7.5 percent two decades
ago. Now investing in the U.S. government generates an average
coupon of 2.5 percent, according to the Bank of America Merrill
Lynch U.S. Treasury Index.

Fed Pledge

The Fed isn’t planning to raise rates soon. At last week’s
meeting of the policy-setting Federal Open Market Committee,
officials repeated their pledge that the rate for overnight
loans among banks will stay low “for a considerable time”
after their asset-purchase program ends.

They tapered their bond buying by $10 billion for a third
time, to $55 billion a month, and predicted the benchmark rate
will be 1 percent at the end of 2015 and 2.25 percent a year
later, higher than previously forecast. The rate averaged about
5 percent in the year before the 18-month recession began in
December 2007.

Some seniors are benefiting from the Fed’s policies, with
mortgage rates the lowest in at least four decades.

Robert Fischl, 69, of Glenville, Georgia, cut his house
payments by about $2,000 a year by refinancing in April 2013.
His 15-year loan has a 2.3 percent annual interest rate, down
from 4.63 percent on a 20-year loan. He also withdrew $5,000
during the process to help with a $15,000 sunroom expansion.

“I feel very lucky,” he said. “It is a really nice
improvement to the house. We use it year-round.”

Rising Values

Rising home values and record stock prices also are helping
some older Americans. The S&P/Case-Shiller index of house prices
in 20 cities increased 13.2 percent in January from a year
earlier, down slightly from the pace in November that was the
biggest gain since February 2006. The Standard & Poor’s 500
Index jumped 30 percent last year.

“The best thing that’s happened for people looking at
retirement is home prices went and up stock prices went up,”
said Torsten Slok, chief international economist at Deutsche
Bank AG in New York. “U.S. households have never been more
wealthy.”

Even so, men and women 65 and older are staying in the
labor force longer: Their participation rate was 18.9 percent in
February, near a 52-year high, while the overall rate held at 63
percent, near a 36-year low.

Social-Security Changes

People are working longer not only because of financial
need but also because of improved health and longevity, less
physically demanding jobs, more women employees, declines in
company-provided retiree health insurance and changes to Social
Security, according to Boston College’s Munnell.

As the risk and responsibility of saving for retirement
continues to shift to employees from employers, low interest
rates could force some younger workers to hold onto their jobs
longer than they’d planned.

The number of 401(k) plans grew to about 513,000 in 2011
from 17,000 in 1984, while active participants increased to 61
million from 7.5 million, according to Labor Department data. In
that time, single-employer defined-benefit pension plans fell to
about 43,800 from about 165,700.

While William Pagdon knows the Fed keeps rates low to boost
employment, he doesn’t like being collateral damage: He now
figures he’ll have to work a decade longer than he’d wanted.

‘Very Safe’

Pagdon, a 51-year-old scientist who lives in Edison, New
Jersey, with his wife and young son, has about 90 percent of his
assets invested in “very safe, very low-yielding” bonds and
the rest in the stock market, which he fears “will crumble.”

“My plan has been deferred about 10 years, so now I’m
looking at 65 and not 55,” Pagdon says. “Interest rates have
caused my savings to stagnate to close to useless.”

Loomis Sayles & Co. Vice Chairman Dan Fuss, 80, can see the
impact of low rates on retirees at the grocery store near his
home in Wellesley, Massachusetts.

“If you look at the average age of the people bagging the
groceries, I want to help them push the cart out; and look at
those riding the commuter train at rush hour, a lot of them are
my age,” said Fuss, who managed the two best large U.S. bond
funds during the past 10 years.

He says he’s still working because he loves it, yet
empathizes with those who have no choice. “The savers are
screaming.”